The European Bosses Are Ready To Crucify Goldman For Their Sins

LONDON (AP) — The practice wasn't secret and it wasn't illegal,
and some of it happened 10 or 15 years ago. But the practice of
European governments reportedly using complex financial
transactions to move debt off their books is getting closer
attention from markets and the European Union.

The deals, known as swaps, let some governments shrink the
apparent size of ther deficits, unsettling news at a time when
markets are taking stock of Europe's struggle with increased
levels of government debt.

Greece has until Friday to disclose to the European Commission
how it used complex currency swap deals and whether they were
used to conceal the real scale of its debt — specifically a 2002
deal that Greek officials said they did with U.S. investment bank
Goldman Sachs.

Under the deal, known as a currency swap, Greek dollar and yen
debt was reportedly exchanged for euro debt for a period at an
advantageous rate to be reversed at a later date. The effect was
to show less debt in the near-term.

The deals carry some of the hallmarks of the financial crisis —
such as off-balance sheet liabilities and highly complex
financial arrangements.

"You have to know first of all whether it was doctoring the
accounts and if this was legal or not at the time it was done,
and if it was legal, it will be necessary to find out whether it
was favorable for stability. Probably not. And in that case, how
we can avoid a repeat, if those measures already were taken,"

Greece wasn't necessarily doing anything new — Italy did
something similar in the 1990s while Belgium has also been
mentioned by analysts as using financial derivatives to improved
its reported fiscal position.

Professor Gustavo Piga of the University of Rome has warned for
years that more and more governments were using the complex
financial instruments that mushroomed during the 1990s.

Piga is amazed that in the nine years since he wrote an analysis
about the growing involvement of governments in the derivatives
markets that no one at the European Central Bank or Eurostat, the
EU's statistics office — even journalists — got in touch with him
to discuss his findings.

However, he hopes that the current concern surrounding Greece's
deal with Goldman Sachs finally triggers belated reforms of this
opaque practise.

Piga told The Associated Press that governments should not be
banned from using trading in complex financial instruments as
part of their debt managements — he said Sweden and Denmark
appear to have done so in according with good practise. But such
deals should be more transparent and comply with accounting
standards.

"The scandal needs fixing; it was never done before but I hope it
will be now," said Piga. "This creates further confusion about
the state of the accounts and investors will be asking higher
risk premia as things start to unravel again."

Greece's dire debt situation has been the main driver in the
markets over the last month or so as investors fret about the new
Greek government's ability to slash its budget deficit from 12.7
percent to 8.7 percent of GDP this year alone.

The former head of Greece's public debt agency argues that it
didn't break the rules and that it wasn't alone in employing
novel financial instruments to manage its debts.

Christopher Sardelis, the head of Greece's Public Debt Management
Agency from 1999 to 2004, slammed suggestions that the debt
refinancing operation with Goldman Sachs was meant to mask the
country's debt and insisted that it was conducted in accordance
to then-existing EU accounting rules — through the deal, Greece
is thought to have booked a near $1 billion profit, used to
neatly trim the deficit.

"Since 2002, when the rules changed, securitizations and swaps
have been recorded as part of the public debt," said Sardelis.

Though Greece insists it has been playing by the rules, the swap
deals still require servicing at some point — the Commission will
hope to get details on this on Friday. This could be costly to
the country, further undermining the government's ability to get
a grip on its public finances.

A Feb. 1 report commissioned by the Greek finance ministry warned
of "significant debt revisions" for 2009 partly because of the
swaps.

Greece isn't the only party in the line of fire — there are
growing calls for the banks themselves to face an investigation
in a much wider probe.

Simon Johnson, an economics professor at the MIT Sloan School
Management and a former chief economist at the International
Monetary Fund, thinks the Commission should launch a special
audit of Goldman Sachs and all its European clients going back to
the start of the euro in 1999, and that the U.S. Federal Reserve
should cooperate with the investigation.

"If this were the U.S., they would get a gentle tap on the wrist
but in Europe, they're more skeptical about big banks," he said.
Goldman Sachs was "aiding and abetting" efforts to undermine the
single currency rules, said Johnson.

Goldman Sachs officials had no immediate comment.

Johnson said an audit is crucial if European policymakers are
going to design a better framework to help out weaker eurozone
economies in the future.

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AP Business Writer Aoife White in Brussels, Demetris Nellas in
Athens and Emma Vandore in Paris contributed to this story.